Rob Atkinson: 'What the president is doing is very useful and nice, but it doesn’t get to the fundamental question' [UPDATED]

The Obama administration plans to announce a $100 billion proposal to make the Research and Development Tax Credit permanent. This is a longtime wish of the business community, but one they'll have to pay to see fulfilled: The White House wants to offset the cost by closing certain corporate tax loopholes. To learn a bit more, I spoke to Rob Atkinson, president of the Information Technology and Innovation Foundation, about the president's proposal, why there's less here than meets the eye, and what a more ambitious plan would look like. A lightly edited transcript follows.

Ezra Klein: Give me some background on the Research and Development Tax Credit. When did we create it? What does it do?

Rob Atkinson: The Research and Development Tax Credit is a tax provision that gives companies that invest in research in the United States a credit on their taxes. It was put in place under the Reagan administration in 1982, because there was a feeling we weren’t competing that well against the Japanese and the Germans. There are two versions, one of them, the simplified version, is more often used, and it’s a 14 percent deduction above 50 percent of your research costs -- so more or less a 7 percent credit in net.

Economists favor the credit because there’s a lot of evidence that companies don’t capture all of the benefits from their research. Those benefits spill over to other companies and industries. So absence a credit, companies will underinvest in research. And the credit also affects where companies choose to do their research. We are now 17th in R&D credit generosity compared to the 30 OECD nations. A decade ago we were number one.

My understanding is that there’s a bit less to this proposal than meets the eye. Right now, we keep reauthorizing the R&D credit every year or two. We’ve not made it permanent because that would mean we’d have to offset 10 years of it all at once. It’s easier to find a bit of money a bunch of times than a lot of money one time. What Obama is proposing here would just make it permanent. That doesn’t mean we’d have a bigger credit in total over that time -- it just means we wouldn’t have to keep coming back to it. [SEE UPDATE AT BOTTOM -- EZRA]>

That’s exactly correct. The permanency issue is a scoring issue. It’s sort of nonsense. You’re paying the same amount every year by extending the credit annually. It’s just that you don’t count it right away, so you don’t have to find all the offsets at once. But making the credit permanent doesn’t cost the government more money than doing it every year. If anything, it costs a bit less because doing it every year makes it less certain, and thus less effective.

So what the president is doing is very useful and nice, but it doesn’t get to the fundamental question that our R&D credit is much lower than other countries. Canada’s credit is three times larger than ours. France and Australia’s credit is four times larger than ours. We like to caricature France as not caring about what their business climate is, but they put down a very aggressive R&D credit, and also created a separate, 60 percent credit for companies giving money to French universities to start large new research centers. In the last year and a half, Belgium, Netherlands and Switzerland put in place a “patent box”: They’re taxing corporate income from research and patents at 10 percent. We tax it at 30 percent.

And is all of this having any effect? Is there any concrete reason to be worried about the amount of R&D being conducted in the United States?

Yes. For the first time in our reported history, corporate R&D as a share of GDP went down more than one year in a row. That’s never happened before. It’s always grown at or above the rate of economic growth, but now it’s gone down. And according to the National Science Foundation, over the past decade, the R&D expenditures of U.S. corporations have grown twice as fast in other countries’, as have their expenditures in the U.S. So companies are expanding their R&D. They’re just doing it in countries like China or Taiwan or Japan or Canada.

Anything I’m missing here?

We did a little modeling exercise in January to look at what academic studies have shown about the impact of the credit on more R&D, and what the impact of R&D is on jobs, and we estimated that if Congress were to increase the credit from 14 percent to 20 percent, which is what Orrin Hatch and Max Baucus have suggested, we’d create 135,000 new jobs and it would eventually pay for itself. That’s what we’d like to see happen. Not just making it permanent, but making it larger.

Update: An administration source e-mailed to say that Atkinson and I misunderstood the proposal in this interview. Here's a more accurate description:

The President is proposing to increase the R&E credit, simplify it and make it permanent. Specifically, he proposes to raise the alternative credit rate from 14 to 17 percent, shifting more businesses to the simplified credit and raising the average value by 20 percent -- which would be the largest expansion in the credit's history. This takes the 10-year cost from the $85 billion for making it permanent as proposed in the President's budget up to about $100 billion.

So it's somewhere between where Atkinson and I thought the White House was going (simply making the credit permanent) and where Atkinson wanted them to go (larger expansion).

What would the fiscal result be of deducting all of a company's R&D costs? Further, could some of these costs - loss of federal revenue - be made up by eliminating many of the federal subsidies, carve-outs, and such?

Finally, I'd like to ask what the chances are that a complete tax overhaul will occur, rather than tinkering around the edges. But I guess I know the answer: none.

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